Emissions Trading - Overview

Overview

The overall goal of an emissions trading plan is to minimize the cost of meeting a set emissions target or cap. The cap is an enforceable limit on emissions that is usually lowered over time—aiming towards a national emissions reduction target. In some systems, a proportion of all traded permits must be retired periodically, causing a net reduction in emissions over time. In many cap-and-trade systems, organizations which do not pollute (and therefore have no obligations) may also participate in trading. Thus environmental groups may purchase and retire emission permits and hence drive up the price of the remaining permits according to the law of demand. Corporations can also prematurely retire allowances by donating them to a nonprofit entity and then be eligible for a tax deduction.